The Smarter Startup

Consolidation is Coming: How to Play Fintech’s Next Phase


Chances of a Fintech consolidation wave are high, particularly as Covid recedes from the headlines. Here's what we expect.

I’ve noticed something interesting popping up on podcasts, panels, and AMAs about the Fintech sector lately. Along with touchless payments and NFTs and direct lending bots, there is a more mundane but perhaps much more impactful development underway in Fintech that could reshape the entire ecosystem.

Fintech as a sector began to take shape as technology was adapted to improve the speed, accuracy, efficiency, and cost of back-office processing. This movement focused initially on banks, which owned much of the process and, having fallen far behind in terms of technical innovation, were ripe for disintermediation by tech-savvy startups hungry to peel off this or that specific process and modernize it, attracting legions of users along the way. By and large, this worked; even today, many banks are beset with legacy tech stacks very resistant to deploying new systems and processes across the entire enterprise, and even when they do, it doesn’t always happen quickly or easily. Meanwhile, many Fintech startups have brought speed and cutting-edge technology to financial processes like payments of all types, settlement & clearing, investments, real estate, insurance, etc. Consumers have been the main beneficiaries through ease of use, lower cost, and greater flexibility, while banks have lost control of these slivers of a given customer’s financial life.

Fintech Consolidation is Coming

However, this may all be changing. Like many sectors, the pandemic impacted Fintech by accelerating many trends that were already in place. One of those trends, already visible in the M&A statistics over the past couple of years, is consolidation.

Fintechs – Moving from ‘Transaction Share’ to ‘Financial Share’

Over and over again in podcasts, upstreams, clubhouse chats, and panels, I’m hearing the same refrain from Fintech CEOs – the core battle is for the primary relationship with the customer. Large banks and unicorn Fintechs don’t want that customer for just one slice of their financial world. They want as much of that customer’s attention as possible.

“We used to measure a Fintech’s penetration in terms of transaction share; now we’re also thinking about it in terms of financial share – how much of a user’s overall financial footprint are we able to capture?”

As one Fintech VC put it during one of our Burkland-hosted panels, “We used to measure a Fintech’s penetration in terms of transaction share; now we’re also thinking about it in terms of financial share – how much of a user’s overall financial footprint are we able to capture?” Case in point: Square originally made payment hardware and software for modern retailers, but the firm has since launched Square Capital, Square Payroll, and Square Financial Services to appeal to a wider set of small-business needs.

Banks – Waking Up to the Value of Fintech

Also interesting has been the transformation within large banks and financial services companies over the same time span. Many have now recognized the value of the Fintech space and used it as a forcing function within their own organizations. Banks remain the linchpin in the ecosystem, as most money ultimately transfers through them, and many of the traditional money-center banks have woken up to the opportunities to expand customer relationships through Fintech, and close loops that were opened ten years ago.

At the same time, these larger legacy players and Fintech startups have both matured. I, for one, no longer hear crypto startups telling me they’re going to put a financial services giant out of business, but these days I do meet plenty who would love to sell to one of them. Meanwhile, legacy financial services companies increasingly see the value in bolting on these startups for their technology, innovation premium, and younger user bases.

We think larger companies, including Fintechs, will increasingly acquire or merge with smaller ones to bring modernized financial services back under one umbrella.

The end result? We think larger companies, including Fintechs, will increasingly acquire or merge with smaller ones to bring modernized financial services back under one umbrella. Three macro aspects are aligning to support this kind of development.

3 Macro Factors Supporting Fintech Consolidation

  1. First is data – getting it isn’t where the value lies, one Fintech CEO told me, but interpreting it and gleaning predictive value from it is. It’s the biggest component of any serious Fintech play – the more data you can acquire, the more predictive you can be, and the more value you can create. Younger users are key to this; they want interaction quick, convenient, and seamless, which means more data creation, sharing, interface innovation, interconnected products, AI, and so on than ever before.
  2. Secondly, regulatory scrutiny is high and going higher. Fintech is unique among technology sectors in that it has to contend with a dizzying array of federal and State agencies and requirements, some of which conflict and many of which were written when ticker machines were cutting edge. Banks, insurance companies, credit card processors, and brokerage companies already operate in this world and are comfortable with it; many Fintech startups are not and find the regulations stifling, expensive, and full of risk. The regulatory landmines for a small tech startup are everywhere – SOC2, GDPR, PSD2, even crypto is coming under increasing scrutiny as it moves more mainstream – making it more attractive for your average Fintech startup to go “in house” at a larger firm.
  3. Finally, I’d be remiss if I didn’t mention the monetary backdrop, which is always a factor in any sector consolidation gaining momentum. Put simply, record low-interest rates and tremendous liquidity in the financial system leaves a lot of un-deployed cash sloshing around in PE firms to fund & finance M&A, meaning high valuations and good exits for early-stage VCs.

Taken together, we think chances of a Fintech consolidation wave are higher than not, particularly as COVID recedes from the headlines. The coming consolidation wave in Fintech will take years to unfold, but if it turns out like other consolidations I’ve seen, it is likely to accelerate as more firms announce transactions. For the venture-backed startups we work with closely at Burkland, this means making sure you’re ready to have a strategic conversation at any point, whether to acquire a complementary part of that financial footprint or be acquired yourself and having your financial house complete, accurate and in order so you can move quickly in any direction.

Taken together, we think chances of a Fintech consolidation wave are higher than not, particularly as COVID recedes from the headlines.